Sembcorp Industries - OCBC Investment 2016-01-29: Utilities still undervalued

SEMBCORP INDUSTRIES LTD U96.SI

Sembcorp Industries: Utilities still undervalued

 Weighed by broad market, privatisation worries

 Utilities undervalued

 Lower FV due to SMM

The share price of Sembcorp Industries has fallen along with the broad-based sell-down of the market, and has also been weighed by talks of a possible privatisation of SMM.

In our report “SG Yards: Exploring possible scenarios”, we point out the obstacles and negative aspects of such a move, unless the price of SMM is sold down to a level that is just too attractive to refuse.
There were also previously hopes that SCI’s dividends could be sustained after the disposal of stake in Sembsita Pacific, but given how the downturn of the oil sector looks set to be a prolonged one, it may be a more prudent move to cut its upcoming final dividend.

However, at current prices, we estimate that the market is ascribing too low a value to SCI’s utilities business.
SMM is currently trading at S$1.49, translating to a value of about S$0.91/share for SCI’s 61% stake in the company. As such, we estimate that the utilities, urban development and other businesses are trading at just more than half of book value.

Looking ahead for the utilities segment, we expect 2016 to be a better year for the Indian plant as it overcomes teething problems.
Other overseas projects should also provide earnings boost once they come online.
In Singapore, stiff competition may persist in the domestic power market.
Meanwhile, we are positive on the longterm prospects of the group, given its good track record and sensible strategy of pursuing emerging market growth.

We have lowered our fair value estimate for SMM to S$1.17, and this leads to a drop in fair value estimate for SCI from S$3.88 to S$3.42, as we update our sum-of-parts valuation.
Maintain BUY; key risks include greater than expected provisions by SMM due to the uncertain Brazil situation and potential order cancellations, as well as a privatisation of SMM at an unattractive price.

Low Pei Han CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-01-29

OCBC Securities Analyst Report BUY Maintain BUY 3.42 Down 3.88